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Posted April 10, 2014 11:03 pm

The Associated Press

Putin: Ukraine debt threatens Europe gas supplies

Russian President Vladimir Putin speaks during a meeting with the People's Front activists in the Novo-Ogaryovo residence outside Moscow on Thursday, April 10, 2014. Vladimir Putin has reached out to European leaders to discuss Ukraine's growing gas debt to Moscow, according to the Russian president's press secretary. (AP Photo/RIA-Novosti, Mikhail Klimentyev, Presidential Press Service)

MOSCOW | Vladimir Putin warned Europe on Thursday that it may face a shutdown of Russian natural gas supplies if it fails to help Ukraine settle its enormous Russian gas bill — a debt that far exceeds a bailout package offered by the International Monetary Fund.

The Russian president's letter to 18 mostly Eastern European leaders, released Thursday by the Kremlin, aimed to divide the 28-nation European Union and siphon off to Russia the billions that the international community plans to lend to Ukraine. It was all part of Russia's efforts to retain control over its struggling neighbor, which is teetering on the verge of financial ruin and facing a pro-Russian separatist mutiny in the east.

Putin's message is clear: The EU has tried to lure Ukraine from Russia's orbit and into its fold, so it should now foot Ukraine's gas bill — or face the country's economic collapse and a disruption of its own gas supplies.

The tough warning raises the ante ahead of international talks on settling the Ukrainian crisis that for the first time will bring together the United States, the European Union, Russia and Ukraine.

The U.S. State Department on Thursday condemned what it called "Russia's efforts to use energy as a tool of coercion against Ukraine."

Hundreds of pro-Russian protesters — some armed — were still occupying Ukrainian government buildings in Donetsk and Luhansk while authorities sought a peaceful solution Thursday to the five-day standoff. And in northwest Romania, U.S. and Romanian forces kicked off a week of joint military exercises.

The amount that Putin claims Ukraine owes is growing by billions every week — and his letter raises the specter of a new gas dispute between Russia and Ukraine that could affect much of Europe. In 2009, Moscow turned off gas supplies to Kiev in the dead of winter, leading to freezing cities across Eastern Europe as Russian gas stopped moving through Ukrainian pipelines to other nations.

In the letter, Putin said Ukraine owes Russia $17 billion due to the termination of gas discounts and potentially another $18.4 billion as a take-or-pay fine under their 2009 gas contract. He added that on top of that $35.4 billion, Russia also holds $3 billion in Ukrainian government bonds.

The total amount is far greater than the estimated $14 billion to $18 billion bailout that the International Monetary Fund is considering for Ukraine.

Putin warned that Ukraine's mounting debt is forcing Moscow to demand advance payments for further gas supplies. He said that if Ukraine failed to make such payments, Russia's state-controlled gas giant Gazprom will "completely or partially cease gas deliveries."

Putin told the leaders that a shutdown of Russian gas supplies will increase the risk of Ukraine siphoning off gas intended for the rest of Europe and will make it difficult to accumulate sufficient reserves to guarantee uninterrupted delivery to European customers next winter. He urged quick talks between Russia and European consumers of Russian gas.

"The fact that our European partners have unilaterally withdrawn from the concerted efforts to resolve the Ukrainian crisis, and even from holding consultations with the Russian side, leaves Russia no alternative," Putin said.

The letter was addressed to 18 heads of states in Europe, including Serbia and Bulgaria, which both rely on Russia for about 90 percent of their gas supplies.

Putin has been tightening the economic screws on the cash-strapped Kiev government since it came to power in February after Ukraine's Russia-leaning president fled the country after months of protest.

Starting this month, Russia state energy giant Gazprom scrapped all discounts on gas to Ukraine, meaning a 70 percent price hike that will add to the debt figure. Ukraine has also promised the IMF it will cut energy subsidies to residents in exchange for a bailout — which means gas prices were set to rise 50 percent on May 1 even before Putin's latest salvo.

Ukrainian Prime Minister Arseniy Yatsenyuk added to European fears of a disruption in gas supplies as he criticized Ukraine's national energy company Naftogaz of mismanagement.

"Naftogaz has 7.2 billion cubic meters of gas in underground storages while it is supposed to be 20 billion. It wasn't me who stole that gas," he said.

Energy Minister Yuri Prodan said earlier this week that Ukraine has not been getting any new gas pumped from Russia amid the pricing dispute, which means it has been relying on storage supplies it previously bought.

The effect of a possible halt in gas supplies could be harsh for Europe but probably not as severe as in January 2009, since Gazprom has built a new pipeline bypassing Ukraine and increased the capacity of existing ones.

The IMF has pledged the loans to Ukraine on condition it undertake economic reforms, with the United States and EU also providing support. The Ukrainian parliament on Thursday passed some of the necessary laws, including cuts in import duties.

The IMF loans, however, are likely to come in several tranches over two years while the Kremlin seems to be demanding the debt to be settled immediately.

U.S. State Department spokeswoman Jen Psaki said Thursday that Washington is "taking immediate steps to assist Ukraine, including the provision of emergency finance and technical assistance." She added that the U.S. is also trying to encourage Ukraine's western neighbors to "reverse natural gas flows in the pipeline so that Ukraine can access additional gas supplies if needed."